6 Managing Project Risk
The EIB green shipping finance facility, as we can see, is thus blended finance—it
brings public and private finance together for green shipping projects. However,
blended finance or blending is merely a vehicle for financing, it does not convert a
financially unsustainable shipping project into one that is sustainable. It also does not
make an unaffordable infrastructure or activity, however green, affordable. In fact
what it could lead to is making subsidies opaque and the costs less transparent. In this
regard, the legal structures underpinning green shipping finance must make a clear
distinction between the transference of risk and risk mitigation. The two are not the
same despite a perceived overlap between them. Whilst it is entirely possible to use
EU taxpayers’ money for guarantees, mezzanine tranches and other instruments or
structures to “buy down” the risk of the project (which might be the approach taken
by the EIB as regards the Green Shipping Guarantee Programme for example), that
approach does not in reality reduce or mitigate the risk of the project. Such an
approach certainly makes the project more attractive to the private partner investor
but it does not make the project, however green, more safe—it merely transfers the
exposure or risk to the EIB (and the EU, generally speaking), namely the taxpayers.
Indeed, private financial partner institutions or private investors have never been
known to refuse to assume certain risks as long as they can hedge it and are properly
rewarded for taking it. However, that approach would result in higher cost, less
affordable infrastructural projects, from a public standpoint.
Thus, it is submitted that as the EIB’s green shipping financing plan is for the long
term, it is preferable to seek out risk allocation structures which align risk exposure
to the ability to manage that risk. In so doing, the public sector contributor, such as
the EIB, would be providing incentives to the investor or partner financial institution
in question actually to mitigate or manage the risk better. Good project structuring
actually to reduce risk would strengthen the financial fundamentals and make the
infrastructural project more affordable and public purse friendly. It would also take
into account of the risk appetites of the different parties; for example, public money
might have a longer time horizon compared to private money. As such, in a good
“blending” structure, the public financing provider could consider offering longer
tenors or deferral features in its financing structures or instruments whilst the private
financial partner institution to assume the shorter term risk. Of course, not all projects
are for the long term—in the recent shipbuilding activities supported by the EIB
Green Shipping Guarantee Programmes examined above, they were clearly
short term.
Another innovation which could be introduced to support green shipping projects, with a higher degree of risk, is for the public sector to assume the activity
risk—e.g. in an infrastructural project, the public sector institution could assume the
construction risk but subsequently “sell down” assets to private investors post
construction when those risk are no longer attendant and are in the past.
The challenge for EU green shipping finance to be underpinned by “blending”
might lie in the conservative reading of the EIB’s competencies. In the example
Legal Aspects of Green Shipping Finance: Insights from the European. . .
147
The EIB green shipping finance facility, as we can see, is thus blended finance—it
brings public and private finance together for green shipping projects. However,
blended finance or blending is merely a vehicle for financing, it does not convert a
financially unsustainable shipping project into one that is sustainable. It also does not
make an unaffordable infrastructure or activity, however green, affordable. In fact
what it could lead to is making subsidies opaque and the costs less transparent. In this
regard, the legal structures underpinning green shipping finance must make a clear
distinction between the transference of risk and risk mitigation. The two are not the
same despite a perceived overlap between them. Whilst it is entirely possible to use
EU taxpayers’ money for guarantees, mezzanine tranches and other instruments or
structures to “buy down” the risk of the project (which might be the approach taken
by the EIB as regards the Green Shipping Guarantee Programme for example), that
approach does not in reality reduce or mitigate the risk of the project. Such an
approach certainly makes the project more attractive to the private partner investor
but it does not make the project, however green, more safe—it merely transfers the
exposure or risk to the EIB (and the EU, generally speaking), namely the taxpayers.
Indeed, private financial partner institutions or private investors have never been
known to refuse to assume certain risks as long as they can hedge it and are properly
rewarded for taking it. However, that approach would result in higher cost, less
affordable infrastructural projects, from a public standpoint.
Thus, it is submitted that as the EIB’s green shipping financing plan is for the long
term, it is preferable to seek out risk allocation structures which align risk exposure
to the ability to manage that risk. In so doing, the public sector contributor, such as
the EIB, would be providing incentives to the investor or partner financial institution
in question actually to mitigate or manage the risk better. Good project structuring
actually to reduce risk would strengthen the financial fundamentals and make the
infrastructural project more affordable and public purse friendly. It would also take
into account of the risk appetites of the different parties; for example, public money
might have a longer time horizon compared to private money. As such, in a good
“blending” structure, the public financing provider could consider offering longer
tenors or deferral features in its financing structures or instruments whilst the private
financial partner institution to assume the shorter term risk. Of course, not all projects
are for the long term—in the recent shipbuilding activities supported by the EIB
Green Shipping Guarantee Programmes examined above, they were clearly
short term.
Another innovation which could be introduced to support green shipping projects, with a higher degree of risk, is for the public sector to assume the activity
risk—e.g. in an infrastructural project, the public sector institution could assume the
construction risk but subsequently “sell down” assets to private investors post
construction when those risk are no longer attendant and are in the past.
The challenge for EU green shipping finance to be underpinned by “blending”
might lie in the conservative reading of the EIB’s competencies. In the example
Legal Aspects of Green Shipping Finance: Insights from the European. . .
147